Budget Musings

Crunch time is coming on the fiscal frontier.

With the presidential election seeming to ride on voters’ views about the size and scope of the federal government, I ran a little test this summer among highly educated people I know.
Asked what share of the U.S. workforce is represented by federal employment, one answered 20 percent. Surely it would be easy to cut jobs in such a huge cadre . . . except the real number is about 3 percent. Another believed members of Congress earn full-salary pensions after just one term in the job—a good indicator of profligate spending . . . if it were true, which it is not.
If elites don’t know much about the federal government, then the general public “is strikingly misinformed about the budget,” Wall Street Journal economics editor David Wessel writes in his new book, Red Ink (Crown Business). “The typical respondent to a CNN poll said food stamps accounted for 10 percent of federal spending; it’s closer to 2 percent.” Even harder to understand is a 2008 Cornell University poll “in which 44 percent of those who receive Social Security checks and 40 percent of those covered by Medicare say they ‘have not used a government social program,’ ”
he says. Of course, people think Washington wastes a lot of money, too: 51 cents of every dollar, according to a 2011 Gallup poll.
Against this sea of ignorance, it’s not surprising that President Obama and Republican challenger Mitt Romney have been less than honest in their portrayal of one of the biggest problems the country faces: continuing high deficit spending, borrowing and accumulation of national debt. 
Romney endorsed key elements of the budget plan put together by his running mate, Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, that would erase deficit spending gradually over the next three decades. This plan features tax cuts and would pay for them through elimination of tax breaks and reductions in spending programs. The big problem is Romney and Ryan offer few specific ideas about how that might be done beyond a Medicare voucher plan that’s become a political hot potato. Analysts have concluded that cuts would be needed in popular tax breaks for homeownership and employer-provided health insurance, among others, to finance the Romney plan. 
With tax increases and some spending cuts, the fiscal 2013 budget Obama unveiled last winter would, with decent economic growth, stabilize the national debt as a (high, 76 percent) share of the nation’s gross domestic product even as deficits continue. But Obama’s budget counts phantom savings from ending current wars, as if to assume those 
deficit-financed conflicts would continue indefinitely in the absence of action. 
In his campaign, he’s not mentioning two key steps he contemplated during this summer’s budget negotiations: reining in Medicare and Medicaid growth. Even Obama loyalist Christina D. Romer, former chairwoman of his Council of Economic Advisers, recently argued that “compassionate deficit reducers should be specific about what they would cut.”
In mid-September, Congress was poised to pass a continuing resolution, holding agencies to their 2012 spending levels into late March 2013. Serious budget action to avoid the so-called fiscal cliff won’t occur until this November and December. With tax rates set to rise Jan. 1 and budget sequestration to take effect on Jan. 2, these negotiations will be critical, not least because Moody’s Investors Service warned on Sept. 11 that it would downgrade its rating on government bonds, as did Standard & Poor’s on Aug. 5, if there’s no budget agreement. 
The real need, mostly unaddressed, is to solve the long-term gap between revenue and spending. But in the short term, the sequestration is of particular concern to managers in government agencies. For nonexempt discretionary spending in fiscal 2013, defense accounts would be down by 9.4 percent and nondefense accounts by 8.2 percent on an annualized basis.  
But the cuts will not occur until after the first quarter of the fiscal year is already over. Agencies that spend 25 percent of their annual appropriation in the first quarter would have to absorb sequestration over the remaining nine months of the fiscal year, effectively adding as much as three to four percentage points to the reductions between January and October. 
Secretary of Defense Leon Panetta said such cuts would be devastating. Scholar Norman J. Ornstein, co-author of a new book about Washington’s gridlock titled It’s Even Worse Than It Looks (Basic Books), predicts that sequestration cuts in the food safety inspection workforce would mean that 1 million pounds of tainted meat would reach grocery store shelves. Agencies heavy on personnel expenses would be looking at furloughs of considerable duration. 
Despite wide revulsion at sequestration, it won’t easily be avoided. The best-case scenario in a postelection lame duck session of Congress, said one expert, would be passage of another process to address long-term deficit reduction while kicking sequestration and the looming tax increases down the road again for a few months. But that’s far from a sure thing, especially given the collapse of the last such effort.
The tension between dealing with short- and long-term problems—raised by sequestration and the need to increase the federal borrowing ceiling by early spring—will be the big story once the election is done and gone.

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